HARVARD LAW REVIEW TVol. 85: Io89 choose the set of entitlements which would lead to that allocation of resources which could not be improved in the sense that a further change would not so improve the condition of those who gained by it that they could compensate those who lost from it and still be better off than before This is often called Pareto opti- malityo To give two examples, economic efficiency asks for that combination of entitlements to engage in risky activities and to be free from harm from risky activities which will most likely lead the lowest sum of accident costs and of costs of avoiding accidents.11 It asks for that form of property, private or com munal, which leads to the highest product for the effort of produc Recently it has been argued that on certain assumptions, usually termed the absence of transaction costs, Pareto optimality or economic efficiency will occur regardless of the initial entitle ment. 12 For this to hold, "no transaction costs)must be under to We are not here concerned with the many definitional variations which en- circle the concept of Pareto optimality. Many of these variations stem from the fact that unless compensation actually occurs after a change (and this itself assumes a preexisting set of entitlements from which one makes a change to a Pareto op- ake a return to the prior position also seem Pareto optimal. There are any num- ber of variations on this theme which economists have studied at length. Since in the world in which lawyers must live, anything close to Pareto efficiency, even if desirable, is not attainable, these refinements need not detain us even though they are crucial to a full understanding of the concept. Most versions of Pareto optimality are based on the premise that individuals know best what is best for them. Hence they assume that to determine whether those who gain from a change could compensate those who lose one must look to the values the individuals themselves give to the gains and losses. Economic efficiency may, however, present a broader notion which does not depend up his individualistic premise. It may be that the state, for paternalistic reasons, see pp. III3-14 infra, is better able to determine whether the total gain of the winners is greater than the total loss of the losers I The word"costs " is here used in a broad way to include all the disutilities resulting from an accident and its avoidance As such it is not limited to mone- tary costs, or even to those which could in some sense be "monetizable, 'but rather includes disutilities or costs-for instance, the loss to an individual of his leg - the very expression of which in monetary terms wot costs"is that the market is of little use in gauging their worth, and this in turn gives rise to one of the perty rules may be used. article, The problens n Costs, Resource Alocation lity Rules-A Comment, II .LAW Theorem on Social Cost: A Footnote, II J. LAw EcoN, 503(1968). See also THE THEORY OF PRICE II3(3d ed. I966); Mishan, Pareto Optimality w, I9 OXFORD EcoN PAPERS 255(1967) HeinOnline 85 Harv. L Rev. 1094 1971-1972HARVARD LAW REVIEW choose the set of entitlements which would lead to that allocation of resources which could not be improved in the sense that a further change would not so improve the condition of those who gained by it that they could compensate those who lost from it and still be better off than before. This is often called Pareto opti￾mality.10 To give two examples, economic efficiency asks for that combination of entitlements to engage in risky activities and to be free from harm from risky activities which will most likely lead to the lowest sum of accident costs and of costs of avoiding accidents." It asks for that form of property, private or com￾munal, which leads to the highest product for the effort of produc￾ing. Recently it has been argued that on certain assumptions, usually termed the absence of transaction costs, Pareto optimality or economic efficiency will occur regardless of the initial entitle￾ment.' 2 For this to hold, "no transaction costs" must be under￾o We are not here concerned with the many definitional variations which en￾circle the concept of Pareto optimality. Many of these variations stem from the fact that unless compensation actually occurs after a change (and this itself assumes a preexisting set of entitlements from which one makes a change to a Pareto op￾timal arrangement), the redistribution of wealth implicit in the change may well make a return to the prior position also seem Pareto optimal. There are any num￾ber of variations on this theme which economists have studied at length. Since in the world in which lawyers must live, anything close to Pareto efficiency, even if desirable, is not attainable, these refinements need not detain us even though they are crucial to a full understanding of the concept. Most versions of Pareto optimality are based on the premise that individuals know best what is best for them. Hence they assume that to determine whether those who gain from a change could compensate those who lose, one must look to the values the individuals themselves give to the gains and losses. Economic efficiency may, however, present a broader notion which does not depend upon this individualistic premise. It may be that the state, for paternalistic reasons, see pp. 1113-14 infra, is better able to determine whether the total gain of the winners is greater than the total loss of the losers. " The word "costs" is here used in a broad way to include all the disutilities resulting from an accident and its avoidance. As such it is not limited to mone￾tary costs, or even to those which could in some sense be "monetizable," but rather includes disutilities or "costs" -for instance, the loss to an individual of his leg -the very expression of which in monetary terms would seem callous. One of the consequences of not being able to put monetary values on some disutilities or "costs" is that the market is of little use in gauging their worth, and this in turn gives rise to one of the reasons why liability, or inalienability rules, rather than property rules may be used. " This proposition was first established in Coase's classic article, The Problem of Social Cost, 3 J. LAW & EcON. I (ig6o), and has been refined in subsequent literature. See, e.g., Calabresi, Transaction Costs, Resource Allocation and Lia￾bility Rules-A Comment, Ii J. LAW & EcoN. 67 (1968); Nutter, The Coase Theorem on Social Cost: A Footnote, ii J. LAW & EcoN. 503 (1968). See also G. STIoLER, THE THEORY Or PRICE 113 (3d ed. 1966); Mishan, Pareto Optimality and the Law, i9 OxFoRD EcoN. PAPERS 255 (1967). 1094 [Vol. 85=:l89 HeinOnline -- 85 Harv. L. Rev. 1094 1971-1972